How judicial efficiency impacts trade credit and doubtful receivables

Abstract

Judicial efficiency has been widely identified as a factor that has an impact on credit markets and firms’ financial decisions. In this paper, we study the relationship between judicial efficiency and trade credit granted by firms to their customers, as well as how the judicial system influences the proportion of those credits that are deemed ‘doubtful’. We test our assumption by analysing a sample of 1526 listed, ‘non-financial’ firms located in countries in the eurozone, during the period 2011–2021. The proxies of judicial efficiency are the length of judicial proceedings and rule of law, obtained from the World Bank’s ‘Doing Business’ and the World Bank Governance Indicators (WGI) databases, respectively. The empirical findings confirm our hypotheses that efficient justice allows for increased supplier confidence when extending financing to their customers and reduces doubtful trade credit.